Fiscal Policy Reconsidered

May 17, 2016

Contributors

The Problem

Recently, economists and policy makers have increasingly recognized the important role of effective fiscal policy in mitigating recessions. However, not all fiscal policies have the same stimulative effect on the economy, and economists and policy makers disagree on which tax cuts and stimulus spending offer the biggest returns on dollars spent.

The Proposal

To shore up the economy during a recession, Congress would encourage states to implement temporary sales tax cuts (with revenue losses reimbursed by the federal government) and make tax cuts automatic to reduce the lag time between recessions and stimulus. On the spending side, Congress would expand automatic stabilizers such as SNAP and unemployment insurance, provide grants to states and municipalities, increase infrastructure spending for shovel-ready projects and help states finance new projects, and deploy consumer-directed discretionary programs similar to Cash for Clunkers for large durable goods (e.g., cars, home appliances, and computers).

Abstract

For decades, economists looked to monetary policy, not fiscal policy, both when the economy needed stimulus and when it needed restraint. This clear preference rested on two beliefs: (1) that fiscal policy is too slow and too political, and (2) that monetary policy can always do the job by itself. Recent events have demonstrated that monetary policy might need help in a deep recession and also hinted that fiscal policy might be able to provide that help. In this paper, Alan Blinder proposes a number of ways to speed up fiscal policy actions and, perhaps, to make them a bit less political.